Market Insider

2017 Spring Wheat Market Review

When we started 2017, the spring wheat market was dealing more supply than what it was originally expecting. Before we dig into really what happened in 2017, let’s refresh our memories of what happened leading up to this past year.

More Spring Wheat Than Expected

Ever since the bumper crop of 2013, the market has slowly been working its way through stocks of higher quality wheat coming out of Canada. More specifically, Canada ended 2013/14 with almost 8.7 million tonnes of wheat (or at least that wheat which was not durum). The stocks-to-use ratio that year in Canada was 33%.

After that though, the wheat carryout (and stocks-to-use ratio) started to drop to

· 6.13 million tonnes in 2014/15 (with 23% stocks-to-use ratio)

· 4.08 million tonnes in 2015/16 (with 17% stocks-to-use ratio)

· 4.97 million tonnes in 2016/17 (with 21% stocks-to-use ratio)

The reason for the bump last year was because of a significant dip in exports. Why?

Back in 2013/14, the opposite of what was happening in the US the carryout of US hard red spring wheat sat at just 169 million bushels (or 4.6 million tonnes if you’re using GrainUnitConverter.com). After that, this happened to hard red spring wheat carryout in the United States."

· 212 million bushels (or 5.77 million tonnes) in 2014/15

· 272 million bushels (or 7.4 million tonnes) in 2015/16

· 235 million bushels (or 6.4 million tonnes) in 2016/17

With more than 10 million tonnes of spring wheat available in North America going into the 2017/18 crop year, this had a negative effect on prices. And so, prices trended sideways as 2017 started up. And thus, 2017/18 acres dropped from their long-term averages.

Lower 2017/18 Spring Wheat Production (But Not Really)

The best prices in the first five months of 2017 weren't seen until some weather/planting premium started to get priced in, in May. But it was too late as little under 15.8 million acres of spring wheat got seeded in Canada. That was up about almost 400,000 acres from 2016/17 acres but about 8% - or nearly 1.4 million acres – below the five-year average of 17.16 million acres. StatsCan then said that the final harvested spring wheat number was about 15.65 million acres. That’s up about 8% from last year but still 7% below the five-year average.

In the US, just 11 million acres of spring wheat was seeded, down 5% and 11% from 2016/17 and five-year average respectively. Harvested area of U.S. spring wheat was much lower than 2016. With 10.16 million acres of US spring wheat put through the combine, that was 16% below the five-year average and nearly 10% below last year’s total.

From a production standpoint in the U.S., drier conditions in major spring wheat production areas meant lower yields. More specifically, American spring wheat yields dropped 13% year-over-year to 41 bushels in 2017/18. This meant that just 11.3 million tonnes of total spring wheat were harvested. This included 10.5 million tonnes or 385 million bushels of hard red spring wheat. That's down nearly 22% from last year's harvest, and 26% form the five-year average.

This was better than the market was expecting back in July. Over the course of a couple of weeks, we saw spring wheat prices in the Canadian Prairies jump above $8 CAD / bushel, and then $9 in a few places. Of course, hindsight is 20/20 but given where spring wheat prices had been, this was an easy decision to make some sales of 2016/17 old crop and even lock in 2017/18 production that was still in the field. The savviest of grain marketers even priced out some 2018/19 crop!

But wheat is a weed after all and production surprised the market, hence the price pull back to similar levels as to this time a year ago. In December, StatsCan came out with a very bearish 22.5 million tonnes of spring wheat production number in the Great White North. Thus, there's still a fair amount of spring wheat in the pipeline. Across the border, the USDA is currently forecasting that there will still be 157 million bushels (or 4.27 million tonnes) of hard red spring wheat available in the US by the end of the 2017/18. If realized, that’s a drop of 33% year-over-year.

So why aren’t prices higher in the US? Lower exports don’t help. Currently, the USDA is forecasting 17% less American hard red spring wheat exports in 2017/18 than the year prior. Comparably, Ag Canada is expecting 5 million tonnes of non-durum wheat to still be available by the end of 2017/18. The good news is that Canadian non-durum wheat exports are expected to climb 10% year-over-year to 17.2 million tonnes.

What Now for Spring Wheat Prices in 2018?

Going into 2018, there are 5 different factors that we have identified in the newest FarmLead product, GrainCents, as either bullish, bearish, or noise for spring wheat.

Through December 31st, the Canadian Grain Commission says that 6.61 million tonnes of non-durum wheat has been shipped out of Canada. Further, domestic disappearance is crushing it, with 2.23 million tonnes used thus far – 75% more than the same time a year ago for the 2016/17 crop. But producer deliveries aren’t tracking at the same pace, with just 7.76 million tonnes dumped at Canadian elevators so far, 6% more than December 31, 2016.

Will we see higher prices in 2018? The one thing that could propel spring wheat prices is the interpretation of drought monitor reports of the next few weeks and months. We’ve noted how dry it is in the past and if stays cold without much snow, it creates further soil moisture risk for hard red spring wheat areas.

Thus, there is some likelihood that we see another spike like we did in June and July 2017, but we’re not going to ignore spring wheat price rallies between then and now.